4 Ways to Improve Your Odds of Securing Fiduciary Liability Coverage
More than 80 “excessive fee” class actions challenging the appropriateness of retirement plan fees were filed in the first eight months of this year, three times the total for 2019. Increased litigation frequency, together with rising settlement amounts and an aggressive plaintiff’s bar, is contributing to rapidly increasing costs and a reduction in the availability of fiduciary liability insurance.
With defense costs typically running into the millions of dollars — even for companies that do everything by the book — insurers are becoming progressively more wary of offering fiduciary liability coverage, and only doing so when insureds tick all the right boxes. When they do offer coverage, insurers are increasing retentions, which in many cases are upwards of $1 million. Meanwhile, premiums that had been stable for years are quickly trending upwards. Average premiums for public companies increased almost 13% in Q3 2020, compared to 6.8% the previous quarter, according to Marsh data.
These market trends are affecting businesses across all industries and of all sizes, with the plaintiff’s bar targeting plan assets as low as $100 million. That underscores the need for all organizations to revisit their fiduciary liability renewal strategies.
As we continue to navigate a difficult market, businesses can take several steps to improve their likelihood of securing the right fiduciary coverage.
1. Give Due Attention to Your Renewal Process
Historically, securing fiduciary liability coverage required a relatively simple application, typically submitted in conjunction with another line of coverage. However, greater underwriter scrutiny now requires that businesses put additional effort into filling their policy renewal documents, including providing insurers with additional information and documentation. Underwriters are particularly interested in fees paid per participant in employee benefits programs, with several insurers requiring separate excessive fee questionnaires in addition to the standard application. It has become typical for underwriters to require applicants to provide copies of their 408(b)(2) fee disclosure form, which their record-keepers should provide.
2. Set a Robust Strategy Ahead Of Renewal Meetings
It’s essential to have a clear understanding of your priorities in relation to fiduciary liability coverage. Determine, for example, your company’s comfort level with accepting higher retentions and whether there is a desire to convert some of the program to Side-A only coverage to limit the personal liability of fiduciaries. As part of your renewal strategy meetings, discuss with your broker your risk profile and the best ways to present it to insurers. Go over different program structures, weigh the benefits of risk transfer against retaining risk, and alternative means of coverage, including a captive. Also consider engaging retirement plan consultants to assist in benchmarking your plan’s fees and procedures.
3. Start the Renewal Process Early
We expect many more companies to market their programs this year, which means that insurers will be seeing a lot of submissions and will need time to issue quotes. Some insurers are requiring higher retentions and/or pricing for fees that are above a specific benchmark. Some insurers are also issuing mandates for renewal changes, while others have yet to set consistent guidelines. Underwriters — even ones who work for the same insurer — could have different criteria, depending on the account. By starting discussions early, businesses will have the time to gather the necessary information and hold timely discussions with their insurers. Keep the lines of communication with your insurer open, and make all attempts to answer any additional questions in a timely manner.
4. Be Prepared To Market Your Program
Less than 5% of fiduciary insurance buyers changed insurers last year. However, the transitioning market and greater selectivity by insurers is likely to require insureds to consider alternatives, both if they are denied coverage or are uncomfortable with terms and conditions.
As you start preparing for a potentially difficult renewal, it is important to manage the expectations of your company’s senior executives and fiduciaries, making sure they understand the current landscape and are prepared for additional costs. And it’s a good idea to involve senior management in negotiation discussions.